By Anna Rascouet and Wes Goodman Nov. 18 (Bloomberg) -- U.S. Treasuries were little changed as yields for longer-dated securities near their lowest levels this month deterred investors before a report that may show consumer prices rose 0.2 percent in October. Ten-year notes snapped a four-day gain as economists said the U.S. will increase its five- and seven-year note auctions to record levels when it announces the amounts tomorrow. A U.S. report today will show housing starts rose 1.7 percent in October from September to an 11-month high, according to a Bloomberg survey, damping demand for the relative safety of the nation’s debt. Investors are seeking higher-yielding assets just as President Barack Obama borrows record amounts to try to sustain the U.S. economic recovery. “There is an underlying selling mentality,” said Peter Chatwell, London-based fixed-income strategist at Calyon, the investment-banking arm of Credit Agricole SA. “People are waiting to get more details about supply tomorrow. They have to be prepared for yields to be pushed higher, because they don’t reflect growth prospects.” The 10-year note yield fell 2 basis points to 3.34 percent as of 8:46 a.m. in London, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 fell 4/32, or $1.25 per $1,000 face amount, to 100 9/32. Demand began to wane after the rate declined to 3.31 percent yesterday, the lowest level since Oct. 20. Ten-year yields will rise to 3.52 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Debt Sales The U.S. will probably sell $44 billion of two-year notes on Nov. 23, $42 billion of five-year debt on Nov. 24 and $32 billion of seven-year securities on Nov. 25, according to Wrightson ICAP LLC, a Jersey City-based research firm that specializes in government finance. The two-year note would match the record amount sold last month. U.S. marketable debt totaled $6.95 trillion in October, after climbing to a record $7.01 trillion in September. Housing starts climbed to an annual rate of 600,000, the most since November 2008, according to the median forecast of 77 economists in a Bloomberg survey. Treasuries have fallen 1.9 percent this year as the economy recovered from the steepest recession since the 1930s, indexes compiled by Bank of America’s Merrill Lynch unit show. German bonds returned 2.2 percent, while Japan’s debt gained 0.5 percent, according to the indexes. Swap Spread The five-year swap spread, or the difference between a five-year swap rate and the equivalent-maturity Treasury yield, narrowed to 27.06 basis points yesterday. The spread, a gauge of credit risk, was the smallest since 2003. Treasury bulls say economic growth will slow as government stimulus programs end, keeping inflation from quickening. The Labor Department will report today that U.S. consumer prices dropped 0.3 percent last month from the year before, according to a Bloomberg survey. It would be the eighth- straight month showing a year-on-year decline. The cost of living climbed 0.2 percent from September, the survey showed. Yields suggest inflation, which erodes the value of the fixed payments from bonds, will be about in line with the five- year average. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 2.16 percentage points, versus the five-year average of 2.17 percentage points. Yield Spread The difference between two- and 10-year yields narrowed to 2.56 percentage points from 2.65 percentage points a week ago, indicating investors are willing to accept less yield to make long-term loans to the government. Treasuries rose yesterday after a report showed producer prices increased less last month than economists forecast. Foreign purchases of U.S. debt totaled $44.7 billion in September, the Treasury reported yesterday. The pace of U.S. economic growth, which was 3.5 percent in the third quarter, will slow to 3 percent in the fourth and to 2.65 percent in the first three months of 2010, according to Bloomberg surveys of banks and securities companies. U.S. Treasury Secretary Timothy Geithner said the government needs to sustain its economic stimulus programs to ensure the recovery doesn’t stall, speaking yesterday in testimony to the Senate Foreign Relations Committee. The Fed repeated its pledge on Nov. 4 to keep borrowing costs at a record low to foster the economic revival Fed Chairman Ben S. Bernanke indicated in a speech two days ago that the central bank’s extended period of low borrowing costs may get even longer amid economic “headwinds.” Yields indicate that Bernanke, who is trying to cap consumer borrowing costs as part of his efforts to spur growth, is having some success. The cost for banks to borrow dollars from each other for six months fell to 0.506 percent yesterday, dropping below the yen rate for the first time in more than 16 years. To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net.

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